Benefits and Pitfalls of Simulated Trading (Demo Trading)
Simulated or Paper trading is so far the best strategy one has to experiment with trading strategies and tools without putting actual money in the market. Simulated trading really favors novice traders to get experienced to the trading systems, technical analysis tools, market behavior, etc. But paper trading has both benefits and pitfalls, and what you get will mostly depend on how you paper trade.
Simulated trading provides novice traders a chance to experience the actual trading process - placing orders, analyzing real-time data, effect of margin on trading, placing stop-losses and position sizing. They let you to experiment with trading strategies without the fear of losing money. The main use of simulated trading is to get used to a trading system, so it allows you to know all/most tools and performance of your future trading system.
But simulated trading
is usually no way near the actual trading. In actual trading, traders’
fear-of-loss, emotions, risk tolerance and trading psychology are strong
factors which determine the success. Often most brokers offer a fixed size
account, like $1 million or half a million, but the trader’s initial capital
investment may be far less or high. Many times, paper trading accounts allow
you to place orders for quantities which are not available in actual market,
and execute orders for unavailable prices. Also many demo traders try to profit
very much with their accounts, not respecting many actual market conditions and